An Empirical Investigation of the Italian Stock Market Based on the Three Factors Model

In this paper we show that the Three Factors Model developed by Fama and French can be applied to a relatively small market as the Italian Stock Market. We employ a two step empirical analysis on the Italian Stock Market data from 1-jan-1980 to 1-apr-2002. We estimate the restricted model, with the pricing errors equal to zero, through the approach of Generalized Methods of Moments (GMM) that required very weak statistical assuptions. The key findings of the paper are: 1-The “size premium” for stocks shown seems to be confirmed for a domestic Italian investor, but, the “value premium” appears to be statistically weakly different from zero. 2-The pricing errors appear to be not different from zero in most of the portfolios. 3-The GMM test of the Three Factors Model appears to support the Fama and French Model applied to the Italian Stock Market.